Trading with good risk management means using stops. Some traders constantly get stopped out and may even develop an aversion to using stops. They blame the stop, but usually the problem is with their entry.
Typically, traders make an entry mistake and then place a standard stop or a tighter-than-usual stop, which virtually guarantees a stop out.
During a trade-along with a client yesterday, the Nasdaq futures set up for a long trade. He and I use the same trading software, which plots clearly defined entries signals right on the chart, so I was able to see exactly what was going on for him.
Through my headset, I heard Scott say, “I got in late on that long so I am using a tight stop.”
I replied, “Scott, you are about to follow one mistake with another.”
Scott’s first mistake was not entering in a timely manner. In trading fast moving markets, however, there are aggressive buyers lurking around the good entry points, so traders need to be focused, confident and act without hesitation when they have an entry signal.
In the heat of the moment, however, we may lack one of those characteristics. We over-analyze, we space out, we hesitate, we worry, whatever. When we finally act, the market has already moved out of our strike zone, but we execute the trade anyway.
This happens to all of us. It’s the next thing we do that separates the successful traders from the breakeven and losing traders.
When amateur traders realize they have made an entry error, they tend to get “tight,” mentally and emotionally. This results in defensive behavior, such as tightening their stop. Tightening one’s stop after a poor entry almost guarantees a mercifully quick stop out.
AFTER AN ENTRY ERROR
Instead, when you make an entry error, you have two (intelligent) tactical options: 1) get out immediately, or 2) place your stop at the point at which you would have placed it had you entered properly.
BOTTOM LINE
Poor entries increase our risk. If you can’t accept that increased risk, then exit. If you choose to stay in, assume the larger risk and manage it rationally.
= = =
Learn more about Dr. Kenneth Reid’s coaching services here.
